Insights by sector

POWER

The power sector is at the forefront of the energy transition as declining technology costs disrupt the status quo. Yet, many regional variations exist, often containing pockets of opportunities. Renewables will attract the vast majority of new capacity additions, while gas will take up coal’s generation share due to emissions regulations.

The power sector will witness strong shifts in the coming decades

Electrification will boost power demand

The strong electrification trend will make power demand grow almost four times as fast as other fuels

The adoption of heat pumps in buildings and the uptake of electric vehicles in road transport will drive this trend. However, since both heat pumps and electric vehicles are considerably more efficient than the technologies they substitute, the growth in power demand will be less than proportional to the rapid growth in the penetration of these electric technologies

Renewables approach a tipping point

Unsubsidized renewables will become widely cost-competitive within the coming 5-10 years, even with existing fossil fuel-based generation

Policy interventions will remain necessary, however, to enable low-cost energy options to materialize

Gas will see sustained but moderate growth

Gas is the only fossil fuel used for power generation that will see continued growth in our forecast (by 1.3% p.a., compared with -0.5% p.a. for coal)

However, gas will not surpass coal in terms of total generation until 2049, by which point solar will be the largest source of power globally

Implications for the sector

Investors

Financiers active in the power sector will need to carefully consider their long-term investment opportunities. In some regions, fossil-fired power generation assets will risk becoming stranded, or they may face government intervention. At the same time, ever-increasing competition in renewables will risk hitting returns for all but the largest, leanest, and best leveraged players

Policymakers

A scale-up in investments will be needed to supply the increasing demand for power globally. To facilitate this, governments will need to bring together public and private actors to reduce the cost of financing new energy projects. New policy mechanisms will need to be introduced to ensure system stability, alignment with climate regulations, and financial sustainability

Utilities

Utilities will face decisions about which assets to keep in their portfolio while searching for value across the value chain as returns on traditional generation are squeezed

To watch in the next 5 years

Important aspects to watch in the coming years will be the development of auction prices for renewables, the evolution of new regulations to accommodate increasing shares of renewable resources in the power systems, and the role that investors will play.

Auction results

Renewable energy auction tariffs will continue to reach record lows, but the actual delivery of projects bid by previous record holders will provide an indication of whether this trend is viable in the long run

Regulators

Regulators and governments will need to consider their role in the transition, as market design and power systems will need to adapt to the fast-changing landscape

Investors

Investors will start to price in the risk of holding assets on the margin and the returns they demand to finance the transition will set the terms for renewables' competitiveness

Share of solar and wind generation in 2050 among top 5 largest countries by power generation

Share of gas generation in 2050 among top 5 largest countries by power generation

Tipping points

Power markets are very local by nature and the way the transition will unfold differs strongly by country. However, they generally share similar tipping points that can accelerate the shifts in power systems.

Renewables cost decline

The speed of renewables' cost decline will determine at which point they will outcompete fossil fuels, depending on local conditions, resource availability, and policies

Climate regulation

To comply with increasingly ambitious climate goals, it is comparatively easy to decarbonize the power sector vis-à-vis other sectors. In addition, in various countries there is already an unfavorable climate for coal or nuclear, which further supports the build-up of a competitive renewables sector

Economics of storage

Storage technologies used for renewables will become increasingly competitive. This trend can accelerate when taking into account revenue opportunities from capacity and ancillary service markets. Further, the adoption of electric vehicles and other consumer technologies can help drive down costs as the market for stationary storage matures

Model

Our Global Power Model optimizes capacity expansion comparing a broad range of available generation technologies. It also models dispatching, optimizing which of the available technologies will be used to meet hourly demand. Incorporating local technology and fuel price assumptions, our model is designed to capture the dynamics and tipping points that will define the disruptive nature of the energy transition.

Inputs

Country data

Hourly demand

Hourly weather profiles

Policies and socio-economic constraints

Technology data

Existing and planned capacity

Perspectives for nuclear, hydro, rooftop PV

Investment and operation costs

Technical characteristics

Market data

Fuel prices per year

Carbon prices per year

Optimization

Investment, $/year

Dispatch by technology, MW/hour

Storage and DSR, MW/hour

Outputs

Operational

Generation mix

Emissions outlook by technology

Technology utilization

Planning

Capacity by technology capacity

Market size for additions and retirements by technology

Investments by technology

Financial

LCOEs by technology

IRRs by technology

Power prices by technology

Capacity payments

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McKinsey Energy Insights

We are the analytical and business intelligence arm of McKinsey & Company’s energy practices. We serve leading international and national energy companies, oilfield services and equipment providers, utility companies, and private equity investors across the entire energy value chain.

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